Taxation of fuel and vehicles when emissions are constrained

Abstract

A tax on fuel combined with tax exemptions or subsidies for low- and zero emission vehicles is implemented in many countries to fulfill the Paris agreement and to curb mileage-related externalities from road traffic. The present study however shows that a tax on fuel should be combined with tax exemptions for high-emission vehicles to curb mileage-related externalities and to fulfill emission targets within the transport sector. The emission target is fulfilled by adjusting the CO2-tax component on fuel. The road user charge on fuel is designed to curb mileage-related externalities. The heavier tax on low- and zero emission vehicles prevent motorists from avoiding the road user charge on fuel by purchasing low- and zero emission vehicles.